The Chinese Market is Driving The US Market Higher

• Posted by Greg Harmon
• on October 25th, 2013

Every day I post a chart of the Shanghai Composite with support and resistance levels. And then I go on to trade US stocks and options 99% of the time. Well, that may not be fair, maybe 99.95% of the time they are US stocks. So why the obsession with China? It has an unmistakable link to the US market. Stop before you start spouting about how the Chinese make everything and export them to the US. That is irrelevant and starting to move away from the truth. I also do not want to hear about how it is a gauge for Copper usage and therefore building and development in general. This is not an economics class. It is the real world. I follow this market because the price action has a solid link to the US Market price action. The chart below shows that the ratio of the Shanghai Composite ($SSEC) to the S&P 500 ($SPY) has been in a falling channel since the US Market bottom in March 2009. The Relative Strength Index, RSI, a measure or momentum, is supporting a continued move lower and all of the Simple Moving Averages (SMA) are above the ratio and

also pointing lower. The ratio has also retraced nearly all of the move higher it experienced from 2005 to early 2008, as it has passed through all of the Fibonacci retracement levels. All this suggest that the Shanghai Composite will continue to weaken against the S&P 500. This can happen as Shanghai Composite weakens and the S&P 500 stays steady or falls less. It can also happen when the Shanghai Composite rises but the S&P rises faster. But the simplest way it can happen is when prices in the Chinese market are falling while the S&P rises. This last pair, what Occam’s razor would suggest, is what has been happening. Looking at the pieces of the ratio in the bottom panel shows that the Shanghai Composite itself has been in a similar downward channel while the S&P 500 has been in a rising channel. None of these three components are showing any signs of changing. And that is good news for the US Market.

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